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Export-Import Cargo (Marine) Insurance back
  • Export-Import Cargo (Marine) Insurance
  • Insurance Policy and Cover Note
  • Insurance Policy versus Insurance Certificate
  • Open Policy versus Specific Policy
  • Advantages of an Open Policy Over a Specific Policy
The term cargo insurance, popularly known as marine insurance, applies to all modes of transportation. The need for export (or import) cargo insurance often differs from exporter to exporter (or importer to importer) and from consignment to consignment. Unless the insurance is mandatory in a trade term, the exporter or the importer may opt not to insure the goods at his/her own risks.
Depending on the international commercial terms, either the seller (the exporter) or the buyer (the importer) is responsible for insuring the cargo. The seller is obligated to insure the cargo in the CIF and CIP terms. The seller may opt not to insure the cargo at his/her own risks in the DDU and DDP terms.
The trade terms DDU and DDP are often used in the turnkey projects where the amount at stake is large. In practice, the seller usually insures the cargo in the DDU and DDP terms.
Insurance Policy and Cover Note :
 
Proof of insurance coverage is contained in a document known as policy or insurance policy. The format of insurance policy forms varies from insurer to insurer, but all essentially have the Institute Clauses and the same information as contained in the Insurance Application-Instructions (IAI).
The policy must be issued and signed by an insurance company or its agent. If more than one original is issued and is so indicated in the policy, all the originals must be presented to the bank, unless otherwise authorized in the letter of credit (L/C).
The sample letter of credit requires "insurance policy in duplicate ...", as such the presentation of one original and one copy (both signed) will satisfy the requirement.
Unless authorized in the letter of credit (L/C), the cover note issued by broker, which is a temporary insurance coverage pending the later issuance of an insurance policy, is not acceptable.
Insurance Policy versus Insurance Certificate :
 
The insurance policy, either a specific policy or an open policy, is issued once by the insurer. In the case of the exporter holding an open policy, he/she cannot send that sole policy to all the buyers and for all the shipments made over a period of time. Therefore, in lieu thereof an insurance certificate---certificate of insurance---is issued by the exporter to each shipment. The blank insurance certificates are supplied by the insurer pre-signed and bearing the open policy number of the exporter.
Unless otherwise stipulated in the letter of credit (L/C), the insurance certificate issued under the open policy is acceptable. If the L/C specifically calls for an insurance certificate, the insurance policy is accepted in lieu thereof. In practice, the insurance policy is often used.
In the sample letter of credit the insurance policy is required, hence the bank will not accept the insurance certificate.
Open Policy versus Specific Policy :
 
Open Policy
The open policy---blanket policy or floating policy---is issued once by the insurer under contract to cover all shipments made by the exporter over a period of time (one year usually) subject to renewal, rather than to one shipment only. It is more often used by the large exporter.
In an open policy the exporter is required to periodically (monthly usually) declare every shipment made to any location, covering any type of goods, and using any means of conveyance, including multimodal transport and transshipment, in order that the insurer may calculate the insurance premiums and invoice them accordingly. The exporter completes the insurance declaration form supplied by the insurer and/or supplies the copy of the insurance certificates (see Insurance Policy versus Insurance Certificate above) to the insurer. An insurance declaration form typically contains the information in an Insurance Application-Instructions (IAI).
Specific Policy
 
The specific policy---voyage policy---is issued by the insurer to cover a particular shipment or one shipment only. The specific policy is often used in many countries. The exporter may use the Insurance Application-Instructions (IAI) or similar form to apply for a specific policy.
Advantages of an Open Policy Over a Specific Policy :
 
Time Saving and Convenience
 
In certain countries the insurance agent (broker) may hand-deliver the insurance policy to the exporter within 4-5 hours after the receipt of the Insurance Application-Instructions (IAI) or similar form. However, in some countries it is not uncommon that the policy is mailed to the exporter 2-3 days after the receipt of the Insurance Application-Instructions (IAI) or similar form. Considering that the national mail in some countries may take four (4) or more days to reach the addressee, the deadline to meet the L/C latest negotiation date may not be met.
In an open policy the exporter may have the documentary proof of insurance coverage in a matter of minutes by simply completing and signing the blank insurance certificates supplied by the insurer.
Shipments Insured Automatically
 
Under the open policy the insurer most often does not know the shipments made by the exporter before the receipt of the insurance declaration form and/or copy of the insurance certificates, but such shipments are insured (please refer to the Utmost Good Faith for related information).
Principles of Cargo (Marine) Insurance :
 
The cargo (marine) insurance works on the principles of insurable interest, utmost good faith, and indemnity.
 
Insurable Interest
 
When the goods are lost or damaged and the owner of the goods (i.e., the title holder in the goods) suffers a loss, fails to realize an expected profit, or incurs liability from the loss or damage, the owner (the title holder) is deemed to have an insurable interest in the goods.
When the exporter delivers the goods, the insurable interest in such goods transfers at the point and time where the risk shifts from the exporter to the importer, as determined by the international commercial terms used. For example, the point and time where the risk shifts in:
CIF (Cost, Insurance and Freight to the named port of destination) ---
the point the risk shifts is on board the ship at the named port of loading, as such the insurable interest transfers from the exporter to the importer at the time the goods pass over the ship's rail.
 
CIP (Carriage and Insurance Paid To the named place of destination) ---
the point the risk shifts is at the depot in the country of shipment, as such the insurable interest transfers from the exporter to the importer at the time the goods are loaded on truck or container, rail car, or airplane (or goods placed in the custody of an air carrier) at the named point of departure.
The time the insurable interest transfers from the exporter to the importer is, technically, the time the exporter endorses the specific policy or the insurance certificate to the importer, as the case may be.
The insurance certificate bears the open policy number of the exporter and, like in a specific policy, the claim agent at port of destination and that claim payable at destination are also indicated.
The importer relies on the specific policy or the insurance certificate and the supporting claims documents as proof that the goods have been insured and that he/she has the insurable interest in the goods when filing for insurance claims against loss or damage.
In the trade terms DDU and DDP, the exporter is responsible for the risks up to the delivery of goods to the final point at destination (the project site or importer's premises usually), as such the insurable interest in the goods does not transfer from the exporter to the importer in the shipment.
Some countries may require that the import and/or export shipments be insured with their national insurance companies.
 
Utmost Good Faith :
  • The principle of utmost good faith is indispensable in any insurance contract. Under the open policy the insurer usually knows only of the shipments made by the exporter after the receipt of the insurance declaration form and/or the copy of the insurance certificates. Under such circumstances, a consignment may have reached the importer in:
  • good condition, that is, without sustaining any loss or damage, before the insurer knows of such consignment. If the exporter knows that the consignment has safely reached the importer and deliberately does not declare such consignment in the insurance declaration form in order to avoid paying the insurance premium, such action is a breach of good faith. Consequently, the insurer may cancel the insurance policy issued to the exporter when the exporter's bad faith is known.
  • bad condition, that is, sustaining loss or damage, before the insurer knows of such consignment. Whether or not the exporter knows that the consignment has not safely reached the importer and fails to declare such consignment in the insurance declaration form, the insurer is liable to pay for the loss or damage out of good faith.
Indemnity :
 
Cargo insurance is a contract of indemnity, that is, to compensate for the loss or damage in terms of the value of the insured goods. The amount insured as agreed between the insurer and the assured forms the basis of indemnity.
Institute Clauses :
 
The Institute Clauses of the Institute of London Underwriters, often referred to as the London Clauses or English Clauses, form the basis of the cargo insurance contract in many countries.
In U.S.A. and some other areas, the Institute Clauses of the American Institute of Marine Underwriters, often referred to as the American Institute Clauses or American Clauses, are used. The American Clauses and the London Clauses can be different from one another.
The most common Institute Clauses include the Institute Cargo Clauses, Institute War Clauses, Institute Strike Clauses, and Institute Air Cargo Clauses.
Institute Cargo Clauses :
 
The Institute Cargo Clauses specifically excludes the risks of war (in the F.C.&S. Clause---Free of Capture and Seizure Clause) and the risks of strikes, riots and civil commotions (in the F.S.R.&C.C. Clause---Free of Strikes, Riots and Civil Commotions Clause). The risks of delay in delivery and inherent vice are not included in the Clauses.
Institute War Clauses (Cargo) :
 
The Institute War Clauses (Cargo) specifically exclude the loss, damage or expense arising from any hostile use of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter. The Clauses cover:
  • The risks excluded in the Institute Cargo Clauses by the F.C.&S. Clause;
  • The loss of or damage to the interest insured caused by: hostilities, warlike operations, civil war, revolution, rebellion, insurrection or civil strife arising there from; mines, torpedoes, bombs or other engines of war;
  • The general average and salvage charges incurred for the purpose of avoiding, or in connection with the avoidance of, loss by a peril insured against by these clauses.
Under the War Clauses, the insurance takes effect only as the interest insured are loaded on an overseas vessel and terminates either as the interest are discharged from the overseas vessel at final port or place of discharge, or on expiry of 15 days counting from midnight of the day of arrival of the vessel at the final port or place of discharge, whichever shall first occur. In other words the goods are covered only while they are on a vessel.
In the case of transshipment, the overseas vessel arrives at an intermediate port or place to discharge the interest for on-carriage by another overseas vessel, the insurance terminates on expiry of 15 days counting from midnight of the day of arrival of the vessel at the intermediate port or place, but reattaches as the interest are loaded on the on-carrying overseas vessel. During the period of 15 days such insurance remains in force after discharge at such intermediate port or place of discharge.
Institute Strike Clauses (Cargo) :
 
The Institute Strikes, Riots and Civil Commotions Clauses is commonly referred to as the Institute Strike Clauses.
The insurance covers the loss of or damage to the property insured caused by strikers, locked-out workmen, or persons taking part in labor disturbances, riots or civil commotions, and persons acting maliciously. However, it does not cover the loss or damage proximately caused by delay, inherent vice or nature of the property insured and the loss or damage caused by hostilities, warlike operations, civil war, revolution, rebel-lion, insurrection or civil strife arising there from.
Institute Air Cargo Clauses (All Risks) :
 
The Institute Air Cargo Clauses (All Risks) are used specifically in air freight. The terms and conditions of cover closely follow the Institute Cargo Clauses (All Risks) revised to suit air shipments. The Clauses exclude sending by Post (i.e., postal shipments not covered).

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